Debt dilemma: how to avoid a crisis in emerging countries
Global institutions, creditors and pressure groups are scrambling to find ways to tackle what many fear will be a wave of sovereign debt crises in emerging economies over the coming year.
The economic and financial consequences of the pandemic threaten to tip dozens of countries into a budget crisis and leave many more burdened with debt and struggling to grow.
These countries need trillions of dollars in additional public spending to help them recover from the crisis, according to the IMF, which has warned that their domestic resources will be woefully insufficient.
IMF Managing Director Kristalina Georgieva warned this month that around half of low-income countries are already in debt distress.
“We know we need to act quickly to restructure their debts. . . there is therefore no fallout on the rest of the world, ”she declared.
The poorest countries are not the only ones to be threatened. The debt burden among the 30 largest emerging economies increased by 30 percentage points of gross domestic product between January and September to reach almost 250% according to the Institute of International Finance.
So far, the global response has been piecemeal, with little coordinated action following the financial crisis ten years ago. But Joe Biden’s victory in the US presidential election has raised hopes that multilateral action could revive next year.
A range of options have been championed by supporters of debt relief.
Extend the debt suspension
The Debt Service Suspension Initiative (DSSI) announced by the G20 in April has so far provided about $ 5 billion in relief to 46 of the world’s poorest countries, of the 73 that are eligible . It has since been extended until mid-2021 and could be further extended.
Advantages: Immediately eases public finances, even if debts eventually have to be paid.
The inconvenients: Lack of participation: So far, the agreed relief is less than a tenth of the increase in external borrowing needs this year, according to the IMF. Critics say it ignores the concerns of debtor countries and private lenders. Its scope is limited to loans from G20 governments and their strategic banks, or around 35% of eligible public debt, according to the World Bank.
Level the playing field
The recently launched G20 framework for implementing debt relief beyond DSSI could be expanded to cover middle-income countries.
Advantages: Equal treatment for official bilateral and commercial creditors, including Chinese lenders, banks and bondholders. Respond to concerns about potential faults and concerns that they would be difficult to deal with on an ad hoc basis.
The inconvenients: Lack of applicability. “The language is good but there are major questions about the implementation,” said Mark Sobel, US chairman of Omfif, a central bank think tank and former head of the US Treasury. “Until they are resolved, we will not believe we are on the right track.”
Bring the IMF together
At the onset of the crisis, the IMF suggested allocating more of its Special Drawing Rights, which countries can sell for cash.
The World Bank, the UN, and governments around the world backed the call, but the Trump administration vetoed it. As the main shareholder of the IMF, the United States has the power to block such an initiative.
The IMF allocates SDRs to its 190 members based on their share in the global economy. It last allocated $ 250 billion in 2009, in response to the global financial crisis.
SDR advocates are hoping the Biden administration will revisit the issue.
Advantages: Does not imply political conditions, therefore acceptable for the domestic policy of debtor countries. An immediate promise of liquidity which in the past calmed the financial markets.
The inconvenients: Benefit more rich countries, under existing distribution rules, although advocates say there are ways around this. Would benefit countries that have resisted reforms.
Relief for multilaterals
Multilateral institutions such as the IMF and the World Bank are the main lenders to poor countries. DSSI countries owed them $ 243 billion at the end of 2019, or 46% of their total public debt, according to the World Bank. Of the $ 42.7 billion these countries owed in repayments in 2020, $ 13.8 billion is intended for multilaterals.
The UN, China, past and current world leaders, NGOs and debt activists have all called on multilateral lenders to join the moratorium on repayments or even cancel outstanding loans.
Advantages: Equal treatment of all creditors prevents relief granted by one group from being spent on payments to another.
The inconvenients: Multilaterals borrow cheaply in capital markets because they are the first in the line before other creditors and have the highest possible credit scores. This allows them to lend at ultra-low rates and fund grants. David Malpass, president of the World Bank, said a moratorium would “undermine” his “reliable access to global capital markets”.
They have also done more to help than any other organization so far: the IMF has loaned $ 102 billion to 82 countries and effectively canceled repayments for the poorest. The World Bank has set aside 160 billion dollars to lend over 15 months, to which is added 80 billion dollars allocated by other development banks.
Attacking private investors
Commercial lenders, who hold about 19% of the outstanding debt of DSSI countries and are due to repay $ 11.5 billion this year, were encouraged to participate in DSSI but did not.
Advantages: Debt activists and others say private creditors should share the burden.
The inconvenients: Debtor countries fear damaging their creditworthiness and losing access to capital markets. To solve this problem, some argue that rating agencies could not consider a request for debt relief as a default. But agencies argue it would violate their duty to clients.
Changing the rules of sovereign debt
The IMF has tried for at least two decades to rethink the international architecture for the settlement of sovereign debts to private creditors. In September, he launched his latest proposals.
It has also been suggested that the US and UK, the legal jurisdictions for most foreign currency sovereign bonds, could pass legislation to prevent bondholders from pursuing legal action.
Advantages: Reduce the disruption and stagnation inherent in protracted conflicts.
The inconvenients: Difficult to conceive, with great legal, political and enforcement difficulties.